Conference Presentation, Panel, Fireside Chat
Trash or Treasure? Finding Value in Distressed-Debt Investing
Milken InstituteRichard Cantor, Lauren Scottlieb, Chris Piccillo, Brian Reynolds, Steve Shapiro, Lawrence, John McWhorter, Brian Wright, David Freeman, Christopher Coleman, Chris Hayes, Steve Grove, Steve McCurry, David Levinson, David Rockefeller Jr., Meredith Whitby
- Solus Alternative Asset Management manages over $6 billion across the capital structure with a primary focus on stressed and distressed opportunities, while Chatham Capital operates its fourth fund with $1 billion dedicated to leverage, first lien, and second lien loans for LBOs.
- Golden Tree, a 15-year-old firm managing approximately $23 billion, is active in corporate credit, high-yield bonds, levered loans, and distressed sectors across New York and London.
- Christopher Coleman anticipates further volatility in oil prices driven by the capital required to finance first lien paper, expecting this influx to create a future oversupply, particularly in the US, which presents an entry point for investment.
- Brian Wright characterizes the global oil supply outlook for the next year as highly uncertain, dependent on deliveries from Libya, Russia, Iran, and Iraq, while Steve Grove expects supply-demand dynamics to remain imbalanced, leading the firm to avoid the oil and gas service sectors despite a 70% reduction in rigs.
- Stephen Shapiro identifies the current market position for oil and gas as early in the trade and notes a lack of favorable supply-demand dynamics compared to other commodities, though he expects dedicated energy funds to perform well and observes that payday lending assets like ACE and CNG trade at significant discounts to potential value.
- Stephen Shapiro notes that Business Development Companies (BDCs) trading near 97 cents with 9.7% dividend yields may offer decent returns despite fundraising challenges, and Steve Grove predicts the distressed market will shift from idiosyncratic opportunities to broad industry themes over the next 12 to 24 months.
- Steve Grove projects that rising 10-year interest rates to between 3% and 4% within the next two years will squeeze marginal companies, potentially forcing them to pay 10% to 12% for capital, creating distressed opportunities trading around 75 to 80 cents on the dollar.
- Chris Piccillo expects the credit cycle to turn with profitable credit groups emerging, though he anticipates cumulative defaults over a multi-year period may be lower than 2006 levels due to higher coverage ratios established in a low-interest environment.
- Lawrence forecasts that the municipal market will remain investable as communities evolve, with private capital addressing public needs in housing, healthcare, and infrastructure, specifically targeting affordable housing and needs-based senior care.
- Lawrence anticipates a rise in Chapter 9 filings over the next five to 10 years as municipalities struggle to define core services, creating opportunities for private capital while bid-ask gaps remain wider due to capital constraints and regulatory influences.
- Regarding Puerto Rico, speakers anticipate a resolution similar to a municipal bankruptcy rather than a Chapter 11 corporate process, with Christopher Coleman Jr. suggesting rate structure adjustments could facilitate a successful restructuring.
- Lawrence views the Puerto Rico debt crisis as resolvable through a cohesive approach utilizing Chapter 9, contrasting it with sovereign crises like Greece by citing specific investment opportunities in Cofina bonds backed by sales tax.
- Lawrence expects new Section 2022 tax incentives and reinvestment in medical, life sciences, and industrial sectors to generate economic activity and provide a runway for renegotiating government-owned corporations in Puerto Rico.
- Steve Grove expects the distressed market to remain deep into the credit cycle, with significant opportunities arising in the next 24 months as the market establishes credibility adhering to indentures, with current pricing around 50 cents offering protection.
- Lawrence predicts the yield curve inversion, historically preceding recessions, is not expected until 2017, suggesting market stability into 2018, though he acknowledges the difficulty in measuring the cycle due to Federal Reserve manipulation and quantitative easing.
- Chris Hayes expects mobile data and video streaming to drive market opportunities through the value of nationwide spectrum, while Chris Piccillo anticipates the credit cycle will turn with profitable groups of credits to invest in.
- Lawrence estimates that 1% to 2% of the municipal market will remain distressed or stressed at any given time, representing a $36 to $50 billion range, with revenue bonds likely continuing to occupy more distress space than general obligation bonds.
- David Rockefeller Jr. warns that extended outflows in high-yield mutual funds could cause significant problems if there are insufficient distressed buyers, whereas a quarter-point rate rise might force some capital into Treasuries but keep investors in high-yield bonds for the long term.
- Steve Grove is establishing a second private equity distressed vehicle to capitalize on expected market volatility, and Chris Hayes predicts that restructured Puerto Rico bonds trading as unwrapped paper will be cheap relative to recovery, while wrapped bonds trade cheap relative to insurer CDS.
- Lawrence expects liquidity from quantitative easing to eventually unwind, forcing redemptions into other asset classes without triggering massive defaults in the next couple of years, while Steve Grove notes the decline in yellow page directories is slower than predictions as they transition to digital.